Labor Market Responses to a Change in Economic System

The economic transitions in Eastern Europe have produced a contraction in the aggregate labor supply and the beginnings of a reallocation of labor from investment goods and heavy industry to consumer goods and services. The expansion of the private sector has reversed - if not eliminated - many of the labor market distortions created under central planning. Thus the first years of economic transition recorded increasing returns to human capital. There is some evidence that growth in the private sector has led to more rational wage structures. Labor unions and minimum wage legislation have done little to inhibit labor market adjustments. Rather, labor market programs and incomes policies - with their emphasis on passive measures and wage subsidies - have retarded the adjustment of wage structures and the restructuring of labor in state enterprises. But, the article observes, changing to active labor policies would probably not reverse the decline in employment. Unemployment in the transition economies is largely a matter of insufficient demand, and labor market policy is unlikely to have much impact until the mismatch between vocational training systems and modern production methods is solved.